Interest-Free Loans, Write-Offs Not Fraudulent Per Se Without Intent: NCLT Mumbai
Kirit Singhania
13 Jan 2026 9:52 PM IST
The Mumbai bench of the National Company Law Tribunal (NCLT) has held that accounting irregularities or regulatory violations, including the grant of interest-free advances, do not by themselves amount to fraudulent trading.
It clarified that fraudulent trading can be established only when there is clear, cogent evidence showing an intent to defraud creditors, assessed in the context of the company's business model.
A coram of Judicial Member Sushil Mahadeorao Kochey and Technical Member Prabhat Kumar dismissed an application filed by Dinkar T. Venkatasubramanian, the resolution professional (RP) of Metalyst Forgings Ltd. It observed:
“In our considered view non-charging of interest on short term loans/advances is contravention of specific provision of Companies Act, however, this can not held to be fraudulent trading dehors the purpose and object of these advances/loans. The provision of additional depreciation and writing off of inventory on account of impairment in its value can not lead to automatic inference in relation to fraudulent conduct of business dehors understanding the business model of the company.”
The RP Metalyst Forgings sought to declare certain past transactions as fraudulent under Section 66 of the Code. It alleged that interest-free short-term loans, related-party dealings, inventory write-offs, additional depreciation, and capitalization of capital work-in-progress during the review period between 2015 and 2017 were carried out by the debtor's erstwhile management with intent to defraud creditors.
The company was admitted into CIRP on December 15, 2017, on a petition filed by State Bank of India. During the CIRP, a transaction audit report of August 2018 flagged several issues, including interest-free short-term loans and advances, write-off of inventory due to impairment, additional depreciation, and capitalization of capital work-in-progress without supporting documentation.
Venkatasubramanian argued that these transactions reflected diversion of funds and fraudulent conduct intended to prejudice creditors.
The tribunal, however, observed that not charging interest on short-term loans may amount to a contravention of provisions of the company law, but such a lapse cannot be equated with fraudulent trading unless the purpose and object of the advances reveal a dishonest intent.
It further held that sale and purchase transactions with related parties or capitalization of expenditure under capital work-in-progress cannot be branded as fraudulent in the absence of examination of their genuineness.
While noting that certain payments to related parties within the look-back period could potentially attract scrutiny as preferential transactions, the tribunal found the material insufficient to sustain allegations of fraudulent trading and dismissed the application.
Case Title: Dinkar T. Venkatasubramanian vs Arun Kumar Maiti and Ors.
Case Citation: 2026 LLBiz NCLT (MUM) 46
Case Number: IA 2839 of 2024 In CP IB 1555 of 2017
For Applicant: Advocates Rishabh Jaisani, Siddhant Marathe
For Respondents: Advocates Alok Dhir, Kanishk Khetan, Princi Jaiswal, Janhavi Hirlekar